06Feb15

Ukraine's currency just collapsed 50 percent in two days

Ukraine, to use a technical term, is broke. That's what you call a country whose
currency has lost half its value in just two days.

The problem is simple: Ukraine has no money and barely any economy. It's
already talking to the IMF about a $15 billion bailout and what's euphemistically
being called a debt "restructuring"--i.e., default--as its reserves have dwindled
down to $6.42 billion, only enough to cover five weeks of imports. (Three
months worth is considered the absolute least you can get by with).

So it was more than a bit belated for Ukraine to stop spending the few dollars it
does have on propping up its currency, the hryvnia. It took until Thursday for it
to do that, though, and, when it did, the reaction was swift and it was violent.
The hyrvnia fell from 16.8 to 24.4 per dollar, and then again to 25.3 on Friday,
on this news that the government wouldn't intervene it in anymore. In all, it was
a 50 percent decline in 48 hours. And this was despite the fact that its central
bank simultaneously jacked up interest rates from 14 to 19.5 percent to try to
get people to hold their money in hyrvinia that would pay them a lot instead of
dollars that wouldn't. That, as you can see, didn't exactly work.

Now let's back up a minute. Why is Ukraine so doomed? Well, it's been
mismanaged on a world-historical scale by oligarchs who, for decades, have
skimmed billions off the country's nonexistent growth. That last part's not
hyperbole. It seems almost impossible, but Ukraine's economy has actually
shrunk since communism ended in 1991. Or since 1992. Or even 1993. And now
its not-so-cold war with Russia is destroying the little that's left. It's not just that
the rebel strongholds in the factory-heavy east have deprived Ukraine of a
quarter of its industrial capacity. It's that it can't afford to fight against what's
still it's biggest trading partner--Russia. Think about that. You don't usually trade
a lot with the country you're going to battle against, but Ukraine's economy is so
dependent on Russia's that it still trades more with it than any other. That means
anything that hurts Russia, like lower oil prices or sanctions, just redounds onto
Ukraine, and puts it in an even bigger financial hole.

Ukraine, in other words, doesn't have a lot of foreign currency, and doesn't have
a lot of ways to earn more of it. Not when it didn't have much of an economy to
begin with, it's fighting its biggest trading partner, and separatists have taken
away its industrial heartland. The only questions are how big the bailout will be,
and how far the hrvynia will fall in the meantime.

Ukraine's currency is weak, and that's not a game.

[Source: By Matt O'Brien, The Washington Post, 06Feb15]

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